Basic GATT Principles
State members of GATT must comply with two basic principles in the conduct of their trade policy namely, the most-favored-nation principle and the national treatment principle.
The most-favored-nation principle relates to customs duties and other charges on imports. Any advantage, favour, privilege or immunity given by a state in relation to any product from any other state member, is to be accorded immediately and unconditionally to like products originating in and from all other GATT member countries.
Accordingly, if an agreement or concession is entered between two states members and either makes a binding tariff concession to the other, that member must extend it immediately to all members of GATT. This is so notwithstanding that it may have been agreed in an agreement between two countries on the basis of mutual concessions. They are not entitled to any mutual concessions from the third-party countries to which it automatically applies.
Most Favoured Nation Principle.
In the absence of the most favoured nation principle, a state would the risk in negotiations that its counterparty might make more favourable concessions to another state thereby incentivizing it against making immediate concessions. The purpose of the principle is to encourage dynamic concessions.
The most favoured nation principle prohibits discrimination in the application of customs duties and charges, subject to important exceptions and limitation. It also applies to any advantage, privilege, favour or immunity granted to a product which originates in another member state.
Products must be given unconditionally and immediately the same privileges and benefits as one originating in the favoured member state. Binding tariff concessions must be extended to all GATT members. Accordingly, the concession must be unilaterally made and extended to all the members.
The MNF principle applies to both imports and exports. It applies in relation to tariffs and other trade benefits, for example, in relation to the formalities and ease of export.
The principle requires the unconditional extension of the concessions/treatments to other member states. It must be immediately and unconditionally afforded.
Questions of interpretation may arise regarding the application of the provisions/conditions. One interpretation is that no reciprocal concessions need be made by the third country. Another interpretation is that it must be available without conditions or that the conditions must not be discriminatory or that they must have an objective basis in the goods themselves. Objective differentiation related to the characteristics of the good may be permitted.
The principle applies to like products. There may be a question of interpretation and dispute as to whether a product is a like product. The matter has been the subject of many complaints and rulings by the WTO Disputes Panel. Difficult questions of interpretation may turn on factors such as the degree of substitution and the respective functions. Both narrower and broader interpretations have been taken.
Discrimination or less favourable treatment may be formal in the sense of being embodied in a law. It may exist in practice or effect. An ostensibly indiscriminate treatment may have a different impact on imports from a particular third state and thereby breach the principle.
Article 13 provides that no prohibition or restriction (such as quotas) shall be applied by any contracting party on the importation of any product of the territory of another contracting party or the exportation of any product destined for the territory of any other contracting party. unless the importation of the like product of all third countries or the exportation of like products to all third countries is similarly prohibited or restricted.
There are exceptions to the general principles for measures which are necessary for the protection of human and animal life and health, public morals compliance with rules and regulations which are consistent with the general GAPP principles, the protection of national treasures and the conservation of finite natural resources. They must not constitute arbitrary or unjustifiable discrimination.
Some countries have entered bilateral voluntary export restraint agreements, notwithstanding that they conflict with the GATT. The best-known example is the multi-fibre agreement dealing with clothes and textiles. The Uruguay Round agreement requires removal of quantitative restrictions under it.
Exception for Customs Union / Free Trade Area
Preferential agreements are permissible under GATT rules provided that trade restrictions are eliminated on most trade between the participants and that customs duties are not higher than the average that formerly applied between the participants prior to the regional trade agreement.
There may be a free trade agreement or a customs union. A free trade agreement necessitates the maintenance of border controls and restrictions in order to monitor rule of origin. Otherwise in the absence of a common external policy, distortions could occur by the import of goods through low tariff members passing to high tariff members thereby circumventing the latter’s tariffs.
The customs union/free trade area exceptions to the MNF principle requires that they must substantially eliminate all restrictions on all trade amongst themselves and do not raise average duties on third parties, relative to those which had prevailed before the agreement was entered. In the absence of this latter principle, state parties who negotiate concessions may liberalize trade between themselves while disadvantaging a third party in respect of access to either market.